Last year’s strong market performance means this year’s required minimum distributions (RMDs) are likely to rise for many retirees. For some, that’s good news. For others, not so much.
Here are advisors’ suggestions for how to best prepare, whatever your client’s situation.
How RMDs Work
RMDs, of course, are the amount of money people 73 and older must withdraw from their tax-deferred retirement accounts by year’s end. (Note: The RMD age increased this year.) These distributions are calculated by dividing a retirement account's returns at the end of the previous year by the account holder’s current life expectancy.
“The life expectancy factor decreases every year, so that—combined with a larger year-end balance—means higher RMDs,” explained Kevin Brady of Wealthspire in New York City. He added that the S&P 500 was up roughly 24% in 2023 while U.S. bond markets rebounded more than 5%.
To be sure, some clients won’t face a distribution increase. “For those who were heavily weighted in tech or in index funds, the gains may be much larger than those who were heavily weighted in value stocks,” noted Jennifer Kim of Signature Estate & Investment Advisors in Los Angeles.
But after 2023’s robust returns, “you would be hard-pressed to find someone with a smaller distribution in 2024,” said Dustin Wolk at Crescent Grove Advisors in Milwaukee.
Differing Opinions
Advisors say that some clients should be celebrating. “A higher RMD is good news for everyone—individuals, households and the local economy,” said John McCafferty, director of financial planning at Edelman Financial Engines in Alexandria, Va.
The other side of the argument: “RMDs are never good news,” said Dean Catino of Monument Wealth Management, who’s also based in Alexandria, Va. “By definition, the account owner is being forced—required—to withdraw from their retirement account, and that withdrawal [comes] with taxes at ordinary tax rates.”
However, he added, it’s important to remember that the retirement accounts have been growing at a compounded, tax-deferred rate “often over several decades. Now that is good news!”
The Good News
For clients who use their required minimum distributions to help pay for living expenses, this year’s increase is a bonus. “RMDs can be used in positive ways, like reducing debt, building cash in the emergency fund or investing the excess,” said Chris Briscoe at Girard, a Univest Wealth division, in King of Prussia, Pa.
The higher distribution signifies that a client’s retirement accounts have “recovered a good amount of the assets they withdrew the prior year,” said Matthew Pastor at Johnson Brunetti, an Alera Group company, in Hartford, Conn.
The Bad News
But the extra cash can also be a problem, especially for “people who have other income and do not need all of the RMD to finance their lifestyle,” said Bob Schneider of Johnson Financial Group in Milwaukee.
It will push some of these clients into a higher tax bracket. Not only could it trigger higher taxation of Social Security benefits, explained Aaron White at Adero Partners in Pleasanton, Calif., but it might force a surcharge on future Medicare premiums, which are based on past income.
“For affluent clients, the burden is more pronounced … potentially exposing them to the 3.8% surtax on investments,” White continued, referring to an extra tax on net investment income for those whose modified adjusted gross income exceeds $200,000 (or $250,000 for married couples).
Lower income clients could suffer, too. “The additional income may impact their ability to qualify for subsidies for health insurance or reduced property taxes,” said Mike Kazakewich of Coastal Bridge Advisors in Westport, Conn.